PrivatizeTransfer the provision of a government service from the public sector to the private.

Privatization

BACKGROUND[APRIL 1, 1998] State and local governments across the country are
struggling with the publics demand for better public services for less money. One
response is to privatize government functionsthat is, to transfer provision of
certain services from the public sector to the private. There are four general types of
privatization: outsourcing, asset sale, commercialization, and vouchers.

Under
outsourcing the government entity remains fully responsible
for providing the service and maintains control over management decisions,
but a nongovernment entity carries out the function or performs the
service. This is the most common privatization method and includes
contracting out, granting franchises to private firms, and using volunteers
to deliver public services.An
asset sale involves transferring ownership of a government
asset to a private party. The government rarely has a role in overseeing
or managing the private company. Commercialization
occurs when a government stops providing a given service; residents
may do without the service or contract with a private company to continue
receiving it. Commercialization occurs most often at the local level.Vouchers
are government-financed subsidies given to people to use in purchasing
specific goods or services on the open market, from either the private
or public sector.

In the last few years, Michigan
state government has engaged in several privatization efforts. In 1992 the governor issued
an executive order creating the Michigan Public-Private Partnership Commission and charged
it with analyzing ways in which state services can be provided more efficiently by
"introducing competition into the public sector." The commission encouraged the
various departments to review each activity and every program in state government to find
candidates for potential privatization. Although the commission no longer is active, a
recent report by the Senate Fiscal Agency concludes that department participation in the
commissions efforts varied widely and that most activities privatized under the
commissions auspices did not result in cost savings to the state. The
commissions main accomplishment was to increase public and policymakers
awareness of privatization as a practical alternative.

In 1995 the State of Michigan
engaged in one of the largest asset sales in the nation. After years of political debate
and court challenges, the state sold the Michigan Accident Fund, the largest workers
compensation insurer in the state. The Accident Fund was established in 1912 as part of
the Michigan Treasury Department, under the regulation of the insurance commissioner, but
over the years its administration shifted to a private board of directors. After many
court challenges concerning the Funds private/public status, in 1989 the Michigan
Supreme Court determined that the Fund was a state agency. Within a few years,
policymakers began the process of selling the Fund through competitive bid. Blue Cross and
Blue Shield of Michigan ultimately won the bid, paying the state $255 million.

Another emerging privatization area
is highway maintenance. The Michigan Department of Transportation (MDOT) traditionally has
contracted with private companies to construct state roads, but until recently, the
department maintained existing highways. In 1992 the department initiated a test of
privatized highway maintenance. The Wayne County Road Commission won the first contract,
to maintain a 27-mile strip of I-94 in metropolitan Detroit. Maintenance for a second
stretch of highway20 miles in the Lansing areawas bid in early 1994, but the
process was open only to private contractors (local and county road commissions were
excluded).

In 1997 the state partially
privatized liquor distribution. Before, state government had bought, warehoused, and
distributed distilled spirits to regional outlets. Recent legislation, among its other
provisions, privatized the Michigan Liquor Control Commissions merchandising and
warehousing functions; the state subsequently sold its three main warehouses and 63
regional outlets and entered into contracts with private companies to perform these
functions. Since the liquor privatization effort is less than a year old, it is too early
to assess its effect on state revenue or consumers.

Local governments in Michigan also
use privatization as a way to increase efficiency in delivering services. Government
functions that have been at least partially privatized in many areas include garbage
collection, delinquent tax collection, certain police protection activities, street
lighting maintenance, tree trimming, snow removal, parking structure operation and
maintenance, and even cemetery operation.

Privatization can affect local
government even when a service continues to be performed by public employees. For example,
to help to balance the citys budget, the mayor of Flint solicited bids from five
private companies to take over garbage collection. The low bid was nearly $2 million under
current expenditures. In response, the city department responsible for garbage collection,
in concert with the employees union, offered to reduce collection costs by
approximately $1.4 million. As a result of the agreed-upon cost savings, the work was kept
in the public sector and the city employees kept their jobs.

DISCUSSIONPrivatization proponents argue that nearly all state
and local government functions can be privatized. They maintain that having a government
monopoly provide services leads to high costs, reduced quality, and stagnation (lack of
innovation and flexibility). Proponents cite numerous examples whereby state and local
governments have enjoyed savings after a service has been bid out to the private sector.
Proponents acknowledge that privatization sometimes leads to abuse, but they argue that
improving the contracting process and better monitoring can eliminate most problems.

Some privatization supporters
contend that what is most important is not whether the work is performed by
private or public employees but that provision of the service is open to
competition. Simply replacing a public monopoly with a private one does not increase
efficiency. Similarly, work done by the public sector can be as productive as that by the
private sector, as long as competition between the two has been encouraged.

The most common arguments against
privatization are that it can lead to collusion, corruption, and taxpayers money
being wasted. The president of the American Federation of State, County, and Municipal
Employees, the union representing many government workers, recently wrote:

Contracting out for government
services often results in higher costs, poorer quality of service, increased opportunities
for corruption, and the loss of government flexibility and accountability. In addition,
women and minorities are disproportionately harmed because they, more so than white male
workers, rely on public employment as a means of advancement. The economy of communities
also suffers as relatively good jobs with benefits become low-wage, no-benefit jobs
provided by companies, who may not even be located in the area.

Privatization opponents also point
to instances in which costs have gone up when a service was performed by a private
company. For example, preliminary analysis by the Senate Fiscal Agency shows that the
maintenance costs charged by a private company maintaining the 20 miles of Lansing highway
are averaging 96 percent and 80 percent more than the average cost of maintenance
performed by the MDOT and county road commissions, respectively. However, transportation
department officials contend that the accounting is misleading because some department
costs are carried in other budget areas. They also argue that this was only a test and
doesnt fully reflect savings that could be achieved by privatization on a large
scale.

Other state privatization efforts
also have run into problems. The Department of Natural Resources had to spend $500,000 to
buy out the contract of a private company that had been hired to upgrade the states
park-reservation system but did not perform up to standards. The Department of Corrections
entered into a $41 million contract with a private vendor that failed to make the required
payments to health care providers; the vendorUnited Correctional Managed
Careeventually was taken over by another private firm that now is delivering the
service.

While some efforts at privatization
have been problematic, it is clear that governments at all levels see it as a tool that
can be used to help control costs and improve services.